Commentary and analysis on markets, personal finance, and wealth building from a contrarian perspective. "I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting there and trying to dream it up all yourself. Nobody’s that smart."
— Charlie Munger

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Saturday, May 23, 2015

Mongolia is again open for business

Rio Tinto has reached agreement with the government of Mongolia to press ahead with the $5bn
(£3.2bn) expansion of the Oyu Tolgoi copper and gold mine.

“Mongolia is back to business. Oyu Tolgoi is a world-class
copper-gold asset and its further development is of great economic significance
for Mongolia," said Chimediin Saikhanbileg, the Mongolian prime minister.

Rio Tinto has already invested $6bn into the project but the
agreement will allow work to begin on the main part of the mine’s development
underground. This will entail excavating 200 kilometres of caverns under a vast
area of Mongolia on the edge of the Gobi desert.

Regular readers will note that I have written extensively about Mongolia and the potential the country holds. In fact I traveled there myself to check things out and wrote about it on my blog. In summary the country has a population of around 3 million and a annual GDP of around $12 billion. By comparison the GDP of Fargo, ND is about the same size as the entire country of Mongolia. The country is sitting on around $2 trillion in identified mineral resources (there is quite a bit more but it will take time to identify them). The Oyu Tolgoi mine is a large open pit copper mine in the Gobi desert that cost around $5 billion to build. During the construction of the mine the Mongolian economy grew in the 12-17% range for a couple of years. It was deemed as the fastest growing economy in the world and it was nothing but blue skies as far as could be seen.

The OT open pit mine has been up and running for close to two years and is profitable. However the real value in the mine is in the underground expansion that was to be undertaken by Rio Tinto. This expansion got derailed when the government went batshit crazy a couple of years ago and passed a bunch of nationalistic laws to block the the takeover of a coal mining company by the Chinese Aluminum Company. This coupled with some other poor decisions put the expansion on hiatus and foreign direct investment along with interest in Mongolia died on the vine as investors moved onto Myanmar and other hot stories.

Thankfully the government has seemingly learned its lesson as the currency depreciated significantly and the economy has slowed to a crawl. A new Prime Minister made it his mission to get the parties together and get the outstanding issues between the parties resolved. This has apparently now happened as both the GOM and Rio Tinto made announcements that a deal had been reached in the last week.

I have written before that the disposition of the Oyu Tolgoi situation would be the litmus test for interest in Mongolia returning.I think that the corner has now been turned and it makes sense for prudent speculators to start looking for bargains in Mongolian real estate and stocks. I am still a big fan of Mongolia Growth Group which has continued to execute during the whole downturn and is now poised to reap the benefit of a return of cash to the Mongolia market. Here is an interview that was recently done with the CEO of Mongolia Growth Group, Harris Kupperman regarding the conditions in Mongolia and what the deal on OT will mean for Mongolia going forward.

I have added to my positions in MGG and the stock has had a nice bounce the last week or so. It is trading well below net asset value and is a real bargain. I would encourage readers to take a look at the recent MGG investor presentation on the company website.

This whole situation was another example of exercising patience and knowing that eventually the GOM was going to realize that their prosperous future is tied to cooperating with foreigners who bring capital and expertise. I am sure there will be additional ups and downs as news plays out but I think the worst is over and we will see a gradual improvement in sentiment towards Mongolia. This is excellent time to buy low and catch the next wave of Mongolian development.